Chinese Yuan Forecast 2018: USD/CNY To Face Possible Rise To 7.20

The US Dollar bounced on Wednesday, as the Chinese Yuan sold off, and the Euro/USD rate lost 0.4%. Analysts at ING believe USD/CNY could be headed as high as 7.20 and are keeping an eye on the US trade deficit. Scotiabank notes a bearish but listless tone to the USD/Japanese Yen exchange rate.

US Dollar-Yuan exchange rate bounces 0.4%

The value of the Dollar rose on Wednesday, as the Greenback found its feet after a few days of weaker price action. The Dollar Index (DXY) was boosted by a better than expected GDP report which showed Q2 revised at 4.2% reaffirming the strength of the US economy at this time. In what has been a very quiet week for data there was little else to get particularly excited about, with next to nothing out of Europe. The US Dollar to Chinese Yuan exchange rate rose in the first meaningful gain for about a week, and it will be interesting to see if the grind back towards 7.000 is back on, or if this is just a temporary drop in an otherwise more stable CNY. In a recent report from ING, the investment bank notes that their main outlook on the Yuan, is for a stable fixing from here onwards, as analysts at the Dutch institution write,

“The People's Bank of China's reintroduction of the counter-cyclical factor in the daily yuan fixing is a subtle yet significant development in the dynamics for global markets. As we showed in a recent research note, changes in the PBoC’s FX policy approach can mark distinct regime shifts and we expect Beijing to now pursue a stable USD/CNY policy”

The connotations of this shift are fairly clear, and as a result we see ING looking for two possible reactions in global FX, as it would first help to clear risk sentiment which has been solid but unspectacular of late while also possibly giving the green light for the basket of Asian currencies to outperform those in emerging markets,

“(a) temporarily take a major source of global market risk off the table, and (b) allow for a tactical outperformance of Asian FX versus EMEA FX.”

CNY performance depends on US Trade War

The Chinese Yuan is famous as one of the world’s most closely regulated currencies. Should the government see fit to let it weaken, they have so far demonstrated a strong ability to see it fall, while their interventions to stabilise it, have also worked impressively. ING’s conclusion for the general forecast for USD/CNY is that if talks with the US deteriorate and more serious tariffs come into view then the pair could rise to 7.000 and beyond,

“PBoC’s attempts to stabilise the yuan are based on the current US-China trade war dynamics; were we to see an escalation – with Washington following through with its threat of 25% tariffs on $200 billion of Chinese imports – then we would expect another bout of CNY weakness… (with USD/CNY possibly moving up to 7.20).”

Keep an eye on US trade deficit, JPY quiet

Perhaps one of the most interesting features of ING’s report was their view on the US trade deficit. ING note that an eye on this factor is arguably the most important data to watch, particularly given that many long-term, bearish forecasts are based on the idea of the “twin deficit” of trade and the balance sheet, as the article states,

“If there’s one US data point worth keeping an eye on in the coming months, it’s the US trade deficit. The July data showed a widening in the goods trade deficit – but this is like a double-edged sword for global markets.”

It is not that simple, however, as this storyline is quite complicated for the USD, and the main unknown is how the sitting President in the United States might react to the fact that the deficit continues to worsen, and he ran on the premise of narrowing that gap,

“The structural US twin deficit story commands a fundamentally weaker dollar in the medium term. But equally, the wider trade deficit could rile a President that is adamant on boosting US trade and domestic competitiveness – and the threat of more protectionist rhetoric could keep a lid on global risk sentiment.”

The Japanese Yen is one of the best indicators of risk sentiment in FX and the wider marketplace, but recently it has been listless, drifting largely sideways with no real conviction in either direction. Analysts at Scotiabank noted that the current environment is slightly bearish for the JPY,

“JPY is quiet, extending its narrow consolidation range for a fourth consecutive session… comments from BoJ board member Suzuki as the policymaker assessed the utility of the recent range band widening for the 10Y yield. The current market tone is bearish for JPY, delivering weakness on the basis of both wider interest rate differentials and pro-risk sentiment.”

Thus, for now, it looks like more of the same for the Dollar, albeit with slightly less momentum. It remains to be seen, however, whether or not the USD can find more rapid upside from here or if it will only prove temporary and the correction lower is set to resume.

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